Kenya’s Banking Sector was a crisis waiting to happen

While analysts say another round of bank failures is not on the cards, they have been warning banks since 2012 to stop understating loan provisions and to increase their capitalisation.

This means the regulator, the Central Bank, was until last year turning a blind eye to the practice, which has now come back to haunt the financial sector.

CBK governor Patrick Njoroge has admitted that the banks previously were competing with each other on who would declare the highest profits at the expense of factual book reporting.

Fears of structural weaknesses in Kenyan banks have resurfaced following the placing of a third bank under receiver management in less than six months, with analysts pointing to weak supervision and outright fraud by directors.

The Central Bank of Kenya put Chase Bank under receivership on Wednesday after a run on deposits of $80 million caused by the restatement of the company’s accounts for 2015 to reflect the actual bad debt and insider lending position; and the exit of the bank chairman and group managing director.

Speculation is rife on which other lenders could be in the crosshairs of the regulator. Already National Bank has been forced to restate its bad debt position and provisioning, and to send home five top managers over the wanting disclosures. Orders for their arrest were issued on Friday.

The situation is similar to the speculation that prevailed during the major bank failures caused by systemic weaknesses in 1988, 1993 and 1998 that claimed more than 50 financial institutions. A running thread in the failures of what came to be known as “political banks” was unsecured lending to directors, politicians and their associated companies; a factor in the closures of Dubai Bank, Imperial Bank and now Chase Bank.

While analysts say another round of bank failures is not on the cards, they have been warning banks since 2012 to stop understating loan provisions and to increase their capitalisation. This means the regulator, the Central Bank, was until last year turning a blind eye to the practice, which has now come back to haunt the financial sector.

One analyst — Citi — warned way back in 2012 that exaggeration of bank profits posed potential risks to the operating performances of the Kenyan banks.
This year, Renaissance Capital and BPI Capital have raised similar concerns.

Red flags

Kato Mukuru, the head of equity research at Exotix Investment Bank said Kenyan banks demonstrated strong performances in 2012, with the banking stocks following the robust operating performance of the industry, which continues to defy the challenging macro-economic and social backdrop.

“As banks ultimately tend to reflect the macro, we think it is time for the market to pay attention to the risks,” Mr Mukuru warned.

Citi also estimated that the six largest banks may be under provisioned by $208 million, with all of them also overstating their profits.

“We are concerned by the relatively slow growth of balance sheet provisions when compared with credit growth. This has resulted in current balance sheet provisions being too low, in our opinion,” Mr Mukuru warned.